New indices help investors choose alternatives
Alternative energy is not only a priority from the perspective of securing sustainable economic development in emerging markets without wrecking the planet. It is a sector that has great investor potential, with direct opportunities in innovative manufacturing ventures and renewable energy generation plants as well as for financial investors.
It is a clear sign for the heightened attractiveness of renewable energy investing that Standard & Poor’s launched an alternative energy index last month. Probably with an eye to sensitivities of investors regarding the diverse aspects of alternative energy, the S&P new power focus arrives as a pair of indices — a clean energy index, created in February of 2007, and a new nuclear energy index.
According to the index fact sheet, 50 companies from 13 countries with a combined market capitalization of $512.5 billion are represented. It is currently (status review from July 31) weighted with a slight bias in favor of nuclear energy. Each of its two sub-indices groups energy production companies in equal ratio to relevant technology, equipment and services providers, creating four clusters of attention.
S&P stated it does not promote or sell any index-based investment product; its declared mission of this thematic index is to “measure investable opportunities in the complete alternative energy space.” In an indication of the earning potentials for alternative energy investments, the agency gave return figures of 3.11% for three months and 25.73% for the year-to-date on its Global Alternative Energy product, comparing these figures with returns of 0.53% and 7.50% over the same periods for the S&P Global 1200 product. At a risk of 17.18% per annum on a three-year horizon, the agency put returns for the alternative energy index at 43.91% for three years.
Another big push for investment transparency and incentives in renewable energy comes from Credit Suisse. It launched at the beginning of August a global warming index with a selection of 40 companies involved in renewable energies or efficient energy usage and reduction of greenhouse gas emissions. This new index comes on the back of another CS introduction in January, when the bank presented its Global Alternative Energy Index with the comment that this sector is on its way to “becoming a full-fledged sector in most indices in the near future.”
Development forecasts for alternative energy companies have projected annual rates of global market growth it the coming three to five years at 15% for wind power and 30% for solar energy — even before the UN released a new climate change report in February which linked global warming stronger than ever to human activity and before a wave of natural catastrophes and weather phenomena rattled the nerves and very lives of planet dwellers throughout spring and summer.
Economics, not ideology
In the unending debate over the extent of and perceived or real damages stemming from human interference in the ecosphere, elements of ideology and conflicting convictions have played a major role in the past fifty years. For profit-oriented entrepreneurs and short-term cost focused corporations, the not scientifically compelling nature of the arguments at times did not provide sufficient impact to enact shifts to costlier methods of production or emissions control.
Additionally, the sharply contrasting views held by the opposing sides of the energy debate involved positions where one interest group would support civilian use of nuclear energy as alternative energy while the concept was anathema to renewable-energy fundamentalists. Such emotion-raising aspects of the renewable/alternative energies issue appear to be shimmering through some of the index categories and sector designations by the early implementers in the new energy sector index issuance that is bound to proliferate in the coming years.
For investors, however, these are only sidebars in a bigger picture. The confluence of the positive financial perspective behind the issuance of these new indices with the latest UN-sponsored research into global development needs marks a starting point for a great new range of money making opportunities.
The United Nations Framework Convention on Climate Change (UNFCCC), at the start of another climate and energy summit in Geneva from August 27, railroaded world attention with a report predicting that curbing of greenhouse gas emissions will require annual spending of $200-210 billion and that by 2030 up to 1.7% of total global investment and financial flows will be directed in response to climate change.
Whereas the predicted share of emission-reducing investments in total global investment is not overwhelming, a working paper for the conference pointed out that private sector investments will dominate in this field and that developing countries will draw in increasing shares of the investment flows. According to the UNFCCC document, “about $148 billion out of $432 billion of projected annual investment in [the global] power sector is predicted to be shifted to renewables, carbon dioxide (CO2) capture and storage (CCS), nuclear energy and hydropower. Investment in fossil fuel supply is expected to continue to grow, but at a reduced rate.”
This is a big pot of new opportunities for energy-savvy Middle Eastern investors who are alert to the future needs of the power industry and adapt their strategies accordingly. The number of regional investment experts with credentials in renewable energy is currently not large but there are some important recent initiatives and reference projects. The most financially potent of them is the Masdar Venture and the Masdar Renewable Energy Fund that the government of Abu Dhabi created a year ago this month, in collaboration with Credit Suisse and the Consensus Business Group.
Shining Examples
The Masdar clean energy fund has been armed with $250 million by the three partners and pursues a mixed investment strategy as fund-of-funds (with $60 million) and direct financing of qualifying ventures through the remaining $190 million at its disposal. Currently in its investing phase, the fund has a worldwide reach but so far focused in practical terms on investing in US (four) and German (one) companies, whose names by a quirky coincidence start either with the letter H or with the letter S.
The total number of individual investments by the fund is expected to reach 20 to 25 transactions. The fund’s two latest projects this summer were a $15 million investment into a company that manufactures a new type of water filtration systems targeting developing markets and an investment into a manufacturer of solar modules whose technology does not require silicon. Earlier investments were with Segway, the manufacturer of personal transportation devices, and with two other solar technology specialists, one in the US and one in Germany.
The combo of photovoltaic technology and Germany is actually an up-and-speeding example for the recent momentum of the renewable power sector. The country’s renewable energy firms claim that Germany today is the world leader in several specialized technologies and the implementation of solar power projects, specifically photovoltaic conversion of sunlight directly into electricity. Until about six years ago, experts assessed this technology as comparatively inefficient and too expensive to make a strong contribution to electricity generation. It was most successful in outer space, where it debuted nearly 50 years ago, in 1958, as power source for satellites.
However, with the right kind of push, photovoltaic plants have a chance to take off in a big and profitable way. The first six megawatts of the world’s largest photovoltaic plant — under construction near the eastern German city of Leipzig — went online in mid-August, six months after the project received its building permit.
The 40 MW plant is scheduled for completion in 2009 with an investment volume of 130 million euros; financing will be sourced later this year through a dedicated closed investment fund lead managed by German regional financial firm SachsenFonds GmbH.
The new plant’s developers, alternative energy company juwi Group, said they expect electricity generation from photovoltaic plants to become competitive in Germany and potentially amount for 10% of electricity generation in a state like Saxony where average sunshine per year is in the range of 1,600 to 1,700 or so hours (Saudi Arabia, at the top of the sun spectrum, records 3,500 hours per year in interior regions).
Expansion of the German solar industry was inseparable from legislation that incentivized both commercial and residential photovoltaic projects. The national photovoltaic capacity expanded from mere 2 MW in 1990 to 2,831 MW at the end of 2006 — and 65% of the new capacity was added from 2004 on when the law on support of renewable energies started offering a scheme of higher rewards, guaranteeing operators 20-year sales of their solar electricity at prices of no less than $0.45 per KW/h.
Even though juwi Group put the investment cost in its new plant per kilowatt at 20 to 40% lower than in a smaller and older photovoltaic plant, it is still very steep at 3,250 euros per installed kilowatt. The company conceded in a recent statement that without governmental incentives and programs such as the EU policy to target 20% of all electricity to come from renewable energies by 2020, large scale power production with photovoltaic technology would not be feasible for another decade.
Financial incentives also played a role for other segments of renewables, namely wind and biomass energy sources, where Germany’s capacity increases in the past ten years were also exponential, according to data from the ministry of environment. Across the spectrum of technologies, the country saw capital expenditures of 11.6 billion euros in renewable energy plant projects in 2006. Combined, investments and operational revenues in the renewable energies sector reached a total of 22.9 billion euros.
On the basis of the German experience, it seems appropriate that Middle East-based investors look first at participating in equity of manufacturing companies and operators which can benefit from high awareness in their markets and have access to government incentives or subsidies in their renewable energy generation projects. Similarly to the Masdar clean energy fund, several investment and private equity firms with Arab partners have in recent years leveraged their networks of Gulf-based investors to source funding that they directed into innovative renewable energy companies outside the region.
But although the number of renewable energy projects under planning for the GCC does not justify any hype at this point, the train of sustainable and profitable innovation is starting to roll in the right direction. Masdar in July signed an agreement with Conergy, another large German producer of solar modules, to install 40 MW of photovoltaic capacity — enough to supply 10,000 homes with electricity — in Abu Dhabi by 2009.
The partnership and the associated knowledge transfer aims at creating a manufacturing base for advanced photovoltaic systems in the emirate which later on would be widened to expertise on other renewable energy generation methods such as wind power, solar cooling, and biomass technologies. Projects on Masdar’s implementation horizon include substantial education and research facilities and a special “energy and technology community,” a free zone in technical terms.
The zone will be thoroughly “green” in its energy design; moreover, it aims to host 1,500 companies with concentration on the area of alternative energy and supporting activities. Abu Dhabi counts on this project to result in an impressive volume of investment opportunities in renewable energies right in the middle of the world’s leading oil producing region, plus a second wave of earnings opportunities when the zone becomes a regional model for green development.
